9 Types of Asset Classes: Definition, Examples and FAQs

By Indeed Editorial Team

Published 16 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Asset classes are groups of monetary assets with similar market dynamics. Investing in different asset categories is vital when diversifying portfolios. Understanding the advantages of each asset class is essential when deciding which asset to purchase. In this article, we discuss nine types of asset categories, provide examples for each asset class and answer common FAQs.

9 types of asset classes

There are nine types of asset classes you can purchase. You can invest in different assets depending on the risk and the amount of capital you're investing. It also depends on how quickly you want to receive returns and how easily you can access the purchases. Types of assets you can buy include:

1. Equities

Equities are shares or stocks that a company sells to share ownership. A stock is an investment signifying ownership of a specific company, and a share is the smallest size of a company's stock. You can profit from stocks when their market price increases or when you receive dividends from the organisation quarterly or semi-annually, depending on the selling company.

You can use a brokerage account to trade stocks. Mutual fund stocks include different stocks that companies package into one to diversify the types of shares you own. Individual stocks are shares from just one company. Consider doing thorough research on a company before purchasing individual stocks from them. Different types of shares you can buy include:

  • Ordinary shares: Ordinary shares are shares businesses sell to the public.

  • Non-voting shares: These are shares that don't give shareholders a right to contribute to decisions or participate in the company's general meetings.

  • Preference shares: These are shares that give the shareholder a fixed dividend payment and hold a priority over ordinary shares.

  • Redeemable shares: These are shares that the selling company can reacquire on a specific date or after a set period.

Related: How to Calculate Fixed Asset Turnover (Plus Importance)

2. Bonds

Bonds are loans you lend to companies, municipalities or governments. Companies use these loans to finance their daily operations and manage projects. You can gain profit from semi-annual or annual interest on bonds. Bonds can have different regulations depending on the company.

You can visit a credible site with bond ratings to find bonds with minimal risks and the interest rates you prefer. High-risk bonds are more likely to have higher interest rates than minimum-risk bonds. You can purchase individual bonds or bond funds. Bond funds contain different types of bonds and are more diverse than individual bonds. Types of bonds you can invest in include:

  • Zero-coupon bonds: You can also refer to them as accrual bonds. Companies repay these bonds at the end of their maturation instead of annual or semi-annual interests.

  • Convertible bonds: You can convert these bonds into equities, such as stocks or shares. You can gain profit when the underlying stocks gain value.

  • Corporate bonds: Companies usually issue these bonds to finance projects or run operations. Your profit comes from regular interest payments.

  • Government bonds: Governments offer these bonds to finance national projects or run state operations. You can purchase these bonds at a discount for profit or receive interest.

  • High-yield bonds: These bonds have high interest but can have a higher risk than other bonds. They may have a lower bond rating than other shares.

  • Investment-grade bonds: These bonds are low risk and are likely to earn a profit. They can have a small yield.

  • Fixed-rate bonds: These bonds pay the same amount of interest over a certain period. The higher the term you lend the issuer, the higher the return.

  • Floating-rate bonds: These bonds pay variable interest depending on market dynamics. These bonds usually pay interest quarterly but can pay monthly, semi-yearly or yearly.

Related: What Is Asset Management? (Plus Types and Benefits)

3. Cash and cash equivalents

Cash and cash equivalents are assets that are readily convertible to money. They can include money in checking accounts or savings accounts. Cash equivalents include money market funds, certificates of deposit, market securities, treasury bills, commercial paper and short-term government bonds, all of which you can easily convert to money within three months. Cash and cash equivalents are easily accessible and have minimal risk, but they can lose value from inflation. Companies can use cash to pay current bills and debts, prepare for emergencies, invest capital or run day-to-day operations.

Related: Management Skills: Definition and Examples

4. Real assets

Real assets are tangible investments, such as real estate, infrastructure, natural resources or land. You can purchase these assets as a long-term investment. These assets are usually low-risk and typically increase in value over time. They can require a huge amount of initial capital to purchase.

You can buy real assets directly or using real estate investment accounts. Real estate investment accounts allow you to buy properties without direct management. Banks can offer mortgages on these properties, allowing you to leverage real assets to improve returns. Crowdfunding allows a company to finance tangible assets by sourcing small amounts of money from a wide range of investors. Crowdfunding utilises social platforms and the Internet to connect investors with real estate properties.

Related: What Does a Real Estate Agent Do? (And How to Become One)

5. Alternative assets

You can purchase these alternative assets to diversify your portfolio. Precious metals and collectibles are examples of alternative assets you can review. Precious metals include gold, silver, palladium, iridium, osmium, ruthenium and platinum. Research the price and rarity when purchasing precious metals. Investing in precious metals can protect against inflation. Collectibles are tangible objects that can appreciate value over time. Fine wine, toys, exotic vintage cars, stamps, musical instruments, rare coins or trainers are examples of collectibles.

Related: Stakeholder vs. Shareholder: Definitions and Key Differences

6. Fiat currencies

Fiat currency is any currency that's legal tender in a given country. You can trade these currencies to gain profit when the exchange rate between two currencies increases. Exchange rates follow forex market dynamics. You can quickly liquidate currencies at any time of the day. Examples of foreign currencies you can buy and sell include:

  • Euro

  • United States dollar

  • Pound sterling

  • Japanese yen

  • Indian rupee

  • Australian dollar

Related: How to Be a Wealth Manager (With Tips to Advance Your Career)

7. Derivatives

A derivative is an asset you get from another investment, such as stocks, bonds or commodities. It's a binding contract between two parties that you can easily liquidate. Types of derivatives include:

  • Futures: Futures contracts allow an investor to buy an underlying commodity or stock and sell it at a specific time in the future.

  • Forwards: A forward derivative allows an investor to receive payment only once when the contract matures.

  • Swaps: Swaps allow an investor to receive payments more than once when they mature.

  • Options: An options contract allows a buyer to sell the contract at any time before the expiration for a specific price.

Related: 7 Derivatives Interview Questions (With Sample Answers)

8. Cryptocurrencies

Cryptocurrencies are electronic currencies whose value is free from government or institutional control. Cryptocurrencies can be easy to buy and sell. Types of cryptocurrencies include:

  • Utility tokens: A utility token is a cryptocurrency you can use for a specific purpose.

  • Payment tokens: You can use these cryptocurrencies to pay or exchange for services.

  • Security tokens: These tokens show ownership of an asset, such as stocks or bonds.

  • Stablecoins: These tokens have a set exchange rate with reference to underlying assets, such as precious metals or fiat money.

9. Commodities

Commodities are raw materials that producers trade in massive amounts. You can categorise commodities into hard and soft commodities. Soft commodities are agricultural products, such as wheat, flour, rye, wood and livestock. Hard commodities are raw materials from mining or extractions, such as gold, aluminium, crude oil, natural gas and copper. Commodities are easy to sell and buy and can protect a portfolio from inflation.

Related: What Is Accounts Receivable and How Does It Function?

FAQs about asset classes

Here are answers to some common questions about investing in asset categories:

What asset categories benefit from inflation?

Inflation is when prices of goods and services increase in a country's economy. Investing in real estate and commodities, such as metals and agricultural products can offer protection from inflation. Some bonds and stocks can also be a hedge against inflation.

Related: What Is a Commodity Broker? Duties, Salary and Skills

What asset categories do well in a recession?

A recession is a decrease in a country's economic output, which can cause a decline in employment. Gold, cash and some stocks can benefit from a recession. You can consider holding onto these assets as they appreciate.

How can you diversify an investment portfolio?

You can diversify a portfolio by investing in different assets. Investing in various assets can provide a portfolio with low risk and high returns. Research an asset class before purchasing.

What are sub-asset categories?

Sub-asset categories are subcategories of assets that have similar market characteristics. They exist within equities and commodities. Sub-asset categories in equities include small caps, mid-caps, large caps and all caps.

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